International Finance

Post-Brexit export markets may be a bad debt risk for British firms, warns Euler Hermes

Saudi Arabia, UAE, Malaysia and China are the most complex countries for debt collection

China ranks amongst the hardest of countries for businesses to recover bad debts from, according to research from Euler Hermes, the world’s leading trade credit insurance company (1)(2).

The findings come from Euler Hermes annual Collection Complexity Scores and Ratings reportwhich measures the challenges of international debt collection procedures in 50 of the largest economies involved in global trade.

The report is designed to provide a simple assessment of debt collection proceedings in each country, helping businesses to make decisions and manage expectations on international trade. It covers economies involved in 90 per cent of global GDP and 85 per cent of world trade and rates collection procedures within each country from 0 (least complex) to 100 (most complex) (3).

As UK looks to establish new trade agreements with markets beyond Europe after Brexit, the global trade credit insurer is highlighting the difficulties companies could face in managing local payments practice and recovering bad debts.

Western European countries made up 14 of the top 16 countries in the rankings with the most straightforward collections processes. But many of the markets the UK government is targeting for post-Brexit trade deals have been identified as having ‘severe’ or ‘very high’ complexity in recovering debts. These include Saudi Arabia (1st), United Arab Emirates (2nd), Malaysia (3rd), China (4th), the USA (18th) and Australia (20th).

Sweden, Germany (joint 50th) and Ireland (48th) were found to have the simplest systems in place (50th), while the UK was ranked joint (37th) with Denmark, and rated as having only ‘notable’ collection complexity’.

Milo Bogaerts, chief executive of Euler Hermes UK and Ireland, said: “Business should not be afraid to explore new markets and opportunities but they need to remember two things that may impact their cashflow and profitability.

“First, global payment culture is a high stakes game and varies widely between markets. The average global Days Sales Outstanding was 64 days in 2017, but companies had to wait up to a nine-year high average of 89 days to get paid by customers in China in 2016 compared to 53 days in Germany and the UK, for example.

“Second, as our research shows, after waiting for payment to try and then pursue outstanding invoices or bad debts can be complex and time consuming in some markets with a poor chance of recovery without expert help.”

The report shows that Middle Eastern and Asian markets are hampered by the low probability to recover debt in practice, even when legal proceedings have ruled in a business’ favour. Court proceedings in the region were also held back by a lack of flexibility in enforcing foreign legal decisions.

In the USA and Canada, the court systems are complicated by a county, state and federal structure in and where no simplified ‘fast-track’ court proceedings are available to settle simple claims. This suggests expected while enforcement may be difficult and the bankruptcy system remains pro-debtor.

(1) Collections capability

Euler Hermes is a market leader in domestic and international debt collections services. Some 303,000 overdue amount files worth more than EUR 1.75 billion were placed with the company in 2017. Euler Hermes employs 390 local debt collection experts who worked to obtain payment for clients in 160 countries last year.

(2) Largest and smallest

Euler Hermes largest full payment received in just one collection case was EUR3.7 million against a debtor in Algeria. The smallest payment was EUR47.60 EUR on the principal debt.

(3) Report methodology

The Euler Hermes score is a measure of the level of complexity relating to international debt collection procedures within each given country from 0 (least complex) to 100 (most complex). To simplify cross-country comparisons, we summarized the level of complexity in a four-module rating system:

  • Notable (score below 40)
  • High (score between 40 and 50)
  • Very High (50 to 60) and
  • Severe (above 60)

The score and rating are combining expert judgment by Euler Hermes’ Collection specialists worldwide and over 40 objective indicators relating to three areas:

  • Local payment practices
  • Local court proceedings
  • Local insolvency proceedings

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